The "strong and stable" fable risks the pound

Outgoing business editor, James Humpish, gives his take on the 2017 election and what's next for the British economy.

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Strength and stability. That's what Theresa May offered the electorate in April, as if she were some sort of altruistic benefactor and not an unscrupulous opportunist. Though it's still the case that no one can really discern what she meant by the promise, what is clear is that she has already failed to do it.

If the election had been held on the day it was announced, the Conservatives could probably have bagged at least 400 seats. But after two months of trading off popularity in order to propose unappetising policies and patronisingly neglecting to engage with both the public and opposition parties, everything changed. Instead of 400 seats, when the exit poll dropped last Thursday, the poll showed the Conservatives had fallen short of the 326 needed to obtain a majority.

If the result of a country's election renders its currency to have the worst day of that year, then something is deeply wrong with the outcome of that election. Expectations had been clearly geared toward a convincing Conservative victory, and despite the poor campaigning, investors had not anticipated the result until the vote had been cast and the die rolled.

When the exit poll saw a forecast hung parliament, the pound's value plummeted by over two per cent. This is a natural reaction to a shock as investors were stooped into uncertainty. It quickly picked up as investors contemplated that a hung parliament could result in a softer Brexit with a minority Conservative government or a Conservative government without May. While the investor reaction is not necessarily disastrous, there are layers of uncertainty which the United Kingdom doesn't need as it negotiates Brexit and endures stagnating productivity growth.

Trying to retrieve the situation, May moved swiftly to gain the loyalty of the Democratic Unionist Party (DUP) to form a government once the results were confirmed and sought the Queen's approval promptly. This, at least, provided some forward guidance for investors despite the fragile position the government is now in, and with many analysts indicating that another general election could occur later this year. However, the DUP will have their own demands. As Ireland's unionist party, it will be wary of the sensitivities faced with simultaneously losing freedom of movement to the EU and sharing a border with the Republic of Ireland.

This is an issue which has afforded little attention by the Conservatives to date, and it may not be a bad thing that they will be pressed to change that but it will be a complication for them. Those seeing Theresa May announcing that she would continue as Prime Minister and form a minority government may have spotted that strength and stability has been removed from the vernacular. She can no longer offer either. Instead she is staying on for "certainty". It is another buzzword. In 350 words, she uses the word three times.

She is offering "a government that can provide certainty and lead Britain forward at this critical time for our country." She asserts that "what the country needs more than ever is certainty and having secured the largest number of votes and the greatest number of seats in the general election, it is clear that only the Conservative and Unionist Party has the legitimacy and ability to provide that certainty."

The rhetoric has now changed. The Conservatives are the most popular party but they are not popular enough to be considered to have a credible mandate and now May must signal her ability to survive rather than strive.

It's incredibly likely that it will not be May who takes the Conservatives to the next general election. The timing of her departure will be up for argument however. There could be an election in October, or the next one could be in 2022. A reasonable prediction might be that she will see Britain formally exit the European Union in 2019 and then step aside for the next leader.

However, reasonable predictions only bear a limited standing at this point. That May's core cabinet is unchanged may be an attempt at her trying to act as though it is 'business as usual'. If they are successful in passing their next parliamentary bill, that may give cause for the government to breathe a collective sigh of relief. What the pound will see isn't exactly a downturn. It is faced with a high degree of volatility given the various contingencies at stake.

May cannot now immediately seek a hard Brexit. She now must placate the DUP, attempt to justify her government to the public, ward off a leadership coup within her own party, present a negotiation strategy to leaving the EU, and reconcile herself with having made the biggest political blunder of a lifetime.

She has bitten off more than she can chew. She is now walking along a tightrope, juggling more balls than she can handle, and the economy depends on her to perform. With the markets as a symbol of investor sentiment, the world has been presented with unimagined uncertainty by someone who presented her pledge of strength and stability as an unarguable fact.

'Strong and stable' has been rendered a fable. For someone who was effectively handed premiership just under 12 months ago, she has made herself, her party, and even this country, a very difficult sell.

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